Update 18Aug2014: Well it now looks as though the government is finally catching on to the problems relating to the legislation in this area which has left UK Companies House with no investigatory power in these matters and having to accept all registrations in good faith without verification as long as they are completed correctly. What is also interesting about the government’s plans for an ‘integrity registry’ which “will crack down on rogue directors” is the global coverage that it has received. One of the most concise news stories is found in the Daily Times in Pakistan here. I wonder why this is?

Posted 17Jan2013 The Economist Intelligence Unit reports that draft legislation presented to the Panel on Financial Affairs of the Legislative Council (Legco, Hong Kong's parliament) on January 7th threatens to withhold information identifying company directors (see here). This is at a time when democracy protesters in Hong Kong are calling for the Beijing-backed leader of the Special Administrative Region (and the man initiating the legislation) to resign (here). An interesting aspect of these demonstrations is the presence of the Hong Kong Colonial Flag (see photo left) that used to fly over Government House when the UK ruled the territory up until 1997. There is much discussion in Hong Kong about what the flag symbolises today (here) but the flag is clearly associated with the British institutions that used to run the territory. Even though the colonial form of administration was not 'democratic' as we would define it in terms of representative democracy, British rule was generally seen as being pretty efficient, reasonably transparent with low level corruption. Since 1997, Hong Kong has prospered greatly partly because of the strength of the rule of law - particularly in relation to commercial transactions - that Britain left behind.

Unfortunately however, Hong Kong democracy activists opposing the draft legislation presented to the Panel on Financial Affairs would find it more difficult today to use UK Companies House as an example of how a world class institution should deal with information identifying company directors (see here my take on why Companies House is world class). Since the 1997 Hong Kong handover, the transparency of the public records held at Companies House has taken a step backwards.

For example, the Companies Act 2006 makes the activities of UK company directors less transparent. It makes the open source, public record, information available from Companies House less useful to those checking to see who controls limited liability companies. It devalues Companies House both as the registrar of UK companies and also as a world class example to those who oppose restricted transparency draft legislation such as that proposed in Hong Kong.

The UK Companies Act now allows UK company directors to use a 'Service Address', keeping their residential address private. So now not only do directors get the benefits of trading with limited liability but also get to hide behind a 'service address'. Consequently, instead of the general public being able to find out where a director behind a company really lives, only credit reference agencies and "specified public bodies for carrying out their public functions" get to apply to see this information.

This may sound reasonable but one of the main reasons why people decide to form a limited company is the benefit of having limited liability. This means that directors' personal property is legally separate from the company's assets, as the company is a separate legal entity. In the event that the company was unable to pay its debts, directors' personal property would not usually be at risk. When operating as a sole trader however, individuals have unlimited liability and risk losing personal assets, such as homes, cars and other property if things go wrong. There have long been discussions about whether this form of limited liability protection encourages people to take undue risks without the corresponding levels of responsibility. But overall, the limited liability company, is arguably one of the greatest innovations (along with property rights) driving different forms of the 'free market' system that generates global human prosperity.

Unfortunately, as a reaction to the animal rights activists who harassed directors of UK companies carrying out scientific research in the mid-noughties, the legislation on director service addresses is a retrograde step - a protection too far for those also benefiting from the protection of limited liability. Directors under this sort of hate-fueled scrutiny could already seek a confidentiality order that their address should not be available for public inspection. Quite rightly, such a confidentiality order would only be given in limited circumstances. The director or secretary would have to satisfy the Secretary of State that the public availability of their address was likely to create a serious risk that they, or a person(s) who lived with them, would be subjected to violence or intimidation. This is entirely reasonable.

Now the same companies marketing service registered office addresses for companies are offering the same service for ALL directors addresses... this means that the only public addresses potential suppliers and customers may see when checking out a company maybe the same address for everything associated with the company. In fact, as a result of these changes, it is possible that EVERY company and EVERY director in the UK could end up being registered at the same service address!

An edition of the BBC's radio programme 'You and Yours' highlighted the problem of company service addresses, where several companies using 145-157 St John Street, London as a registered office address were found to be 'Boiler Room' frauds. This is the home of a 'serviced address' company called Companies Made Simple that is now actively encouraging UK directors to use (for a fee of course) the St. John Street address as their own for the purposes of their directorships. Ludicrous!

In response to this, I may have once suggested that if you don't like these changes in the UK you can always take your business to free market Hong Kong - but it looks like this bad practice is spreading!

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